Content used to be king in the corporate world, which was good news for shareholders of entertainment, media, and publishing outfits, such as Time Warner (TWX), Walt Disney (DIS), Viacom (VIAB), News Corp. (NWS), Sony (SNE), Gannett (GCI), and The New York Times Company (NYT). But the rapid rise of the Internet since the mid-1990s, the rollout of affordable smartphones, notebook PCs, and handheld media players, and vast improvements in broadband digit technologies -- all of which have made it possible for consumers to enjoy films, television shows, newspapers, and music on the Web at little or no cost -- are now putting pressure on content creators around the globe. Consequently, these firms must quickly transition to new business models, or else see the value of their properties decline and their bottom lines erode.
Finding the right business model has proven to be a tall order for most media companies, however. Indeed, the needed paradigm shift has been (dangerously) slow in coming. Television and film studios are still struggling to protect their profits at a time when piracy is rampant, many programs and movies can be downloaded for free on the Internet, and DVDs can be rented inexpensively from Netflix (NFLX) or Coinstar’s (CSTR) Redbox-branded kiosks. The music industry is having little success offsetting declining CD sales with Web-based revenues (e.g., Apple’s (AAPL) iTunes), or at combating illegal digital downloads and file-sharing. And newspapers, the vast majority of which maintain free Internet sites that complement their print products, are seeing advertising sales plummet and their valuable subscription bases dwindle.
Against this difficult and fast-moving backdrop, a handful of tech heavyweights, like Microsoft (MSFT) and Sony, have introduced software platforms with sophisticated digital rights management (DRM) features. These new platforms enable media companies to better protect their content and monitor delivery, while still making it easy for consumers to access their favorite audio or visual programs for playback over the Internet or on home or mobile entertainment systems. They also promise considerable cost savings by increasing server scalability and improving video compression/decompression software.
Apart from the variety of new DRM platforms now available, many content creators are experimenting with alternative business models to win customers and protect their profits. The major Hollywood studios, for instance, are increasingly looking to control all aspects of film distribution, from traditional theatrical release to digital delivery at home. To this end, they are experimenting with new digital download and video-on-demand operations as a way to counteract plummeting DVD sales. They are also, in an effort to pare unsustainable cost structures, scaling back large TV advertising campaigns in favor of cheaper marketing via social networks and other Internet sites. And the studios, looking to minimize dollars lost to piracy, are trying to make movies available for home viewing sooner after release to theaters.
Newspaper publishers, meanwhile, another group of content creators under heavy pressure, are also tinkering with their old business models. (Many U.S. cities have already seen at least one of their daily papers fall by the wayside.) In fact, with circulation and advertising revenues waning rapidly, the days of free news may soon be coming to an end. At the very least, we expect newspapers to start charging customers for access to some of their more popular content. This free/pay hybrid model has worked fairly well for News Corp.’s The Wall Street Journal, among other national publications. It may not be sufficient if the print advertising market remains soft, however.
Some papers may endeavor to further bolster their fortunes by charging for applications (now free) for mobile devices – from Apple’s iPhone to Amazon’s (AMZN) Kindle e-book reader. And others may strike exclusive royalty deals with specific search engines. Most recently, News Corp. was rumored to be in talks with Microsoft to make Bing the sole search engine with access to the media giant’s diverse Internet properties.
Investors looking to take a position in the media sector should be mindful of whether their company of choice, be it a giant conglomerate, a music or movie studio, or a newspaper, has a business model that is compatible with the new Digital Age. Without the right model, content creators may have a hard time realizing the true value of their assets. And shareholders in these lesser-positioned companies may see their own fortunes gradually fade away.